The archived blog of the Project On Government Oversight (POGO).

May 28, 2008

Taxpayers Could Lose $53 Billion From Oil Leases

A new draft report by the Government Accountability Office (GAO) estimates that the federal government could stand to lose $53 billion in royalties from deepwater drilling leases in the Gulf of Mexico. Politicoprinted a story on the GAO's findings after reviewing the draft, which is a revision of earlier GAO estimates.

The royalties in question concern leases issued by the Department of Interior in the late 1990s after Congress passed the Deepwater Royalty Relief Act in 1995. The law was intended to provide incentives for more costly drilling in deeper areas of the Gulf by allowing companies to avoid paying royalties for specific volumes when oil prices were below certain thresholds. However, for leases issued in 1998 and 1999, the price thresholds were errantly omitted, and the price of oil has since increased dramatically, now surpassing four times the original thresholds.

Once the threshold omissions were revealed publicly in 2006, Interior sought to renegotiate the faulty leases with the oil companies. A small number agreed, but the vast majority of them are holding out. Congress has also made several attempts to address the issue but without much success. This relative inaction is partly due to a lawsuit brought by Kerr-McGee (now owned by Anadarko) in March 2006 against the Department of Interior, which if won, could result in the government losing royalties on virtually all deepwater leases. The federal court sided with Kerr-McGee (pdf) in a ruling last year, but Interior has since appealed.

The Interior Inspector General also launched an investigation in March 2006 to determine why price thresholds were omitted in 1998 and 1999 leases. The subsequent report (pdf) found that inadequate scrutiny of the lease contracts, such as substituting the initial price threshold attachments with a citation that didn't refer to thresholds, led to the errors. Nevertheless, the Department of Interior has not taken any disciplinary actions for those who were responsible.

To the contrary, Thomas Readinger, former Associate Director for Offshore Minerals Management at Interior and one of the signatories to the faulty leases, left the department last year to work for a lobbying firm, where he has since registered as a lobbyist for Shell.